Switzerland’s Central Bank Cuts Interest Rates Unexpectedly

The Swiss National Bank [SNB] announced Thursday it was lowering the three-month Libor target range by 100 basis points to 0.5–1.5% with immediate effect. The move marks SNB’s biggest ever rate cut which comes after Swiss exports, a key driver for the economy, fell by 8.1% in October versus the year-ago period in real terms, underscoring the fact that the global economic downturn, particularly in the euro zone, is taking its toll.

Switzerland’s central bank said it was lowering its three-month LIBOR target range (one of the most important benchmarks in the global financial system, used as a base for many types of loans over different periods) as a result of international economic conditions which “continue to worsen appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland in 2009”.

In its statement, SBN emphasized the fact that the rate cut will provide the Swiss franc money market with a generous and flexible supply of liquidity in order to bring the Libor down to the middle of the target range. Further, SBN said that the latest monetary policy easing will provide an impetus to economic activity, and will not jeopardise the return to price stability which is expected to be restored soon. The central bank predicts inflation is likely to fall below 2% as early as the end of this fiscal year. Last week’s data showed Swiss input price inflation eased again in October, permitting the SNB to focus on the country’s retrograding growth outlook.

By lowering the Libor target range by 100 basis points, the SNB is making use of its room for manoeuvre.